Christopher Bailey begins to build his Burberry

On Thursday, as the brand reported a 32.6 percent spike in first-half net profits to 112.7 million pounds, or $173.6 million, Bailey, Burberry’s chief creative officer, addressed investors for the first time as chief executive officer designate. The core message: He’s very comfortable with the prospect of running the show.

Bailey, who will receive both titles, outlined a new company-wide organizational structure, and revealed the promotionof his longtime colleague and collaborator Luc Goidadin to the new position of chief design officer.

Bailey said Goidadin would “oversee all design activities under my leadership. This will allow me to continue to remain fully involved in setting the creative direction and vision for the brand.”

He called Goidadin “one of my most experienced, trusted and talented colleagues who has worked alongside me for over 12 years.”

The company’s organization will be streamlined into three distinct pillars: design, product and communication; regions, and operations and finance, with existing senior executives taking on additional responsibilities.

Bailey said under the new “distilled” structure, he would have “significantly fewer reports” than his predecessor Angela Ahrendts, who will leave the company next year to join Apple as senior vice president of retail and online stores.
He reiterated that there would be “no radical changes” to Burberry’s strategy. “We have always seen art and commerce not as opposing forces, but as two sides to the same coin,” he said, adding, “There is tremendous potential, and fuel in the tank.”

In a separate conference call later in the day, Ahrendts said she was confident about leaving the company with Bailey in charge.

“I would never, ever, ever have considered leaving if I didn’t know that the company was significantly outperforming, and if I was not sure that Mr. Bailey was ready to take the baton,” she said. “He has already been overseeing half of the business. In addition to the collections, all the store design, creative media and everything the consumer sees has gone through his office for the last eight years.”

Asked about her legacy, she said: “That the company will continue to outperform significantly after this transition.”

Profits in the six months to Sept. 30 were boosted by the nonrecurrence of exceptional items, and in particular last year’s charges linked to the termination of Burberry’s fragrance and beautylicense with Inter Parfums.

Stripping out those items, Burberry’s adjusted pretax profits were broadly flat against the corresponding period last year.

Adjusted profit before taxation advanced 0.3 percent to 173.9 million pounds, or $267.8 million. All figures have been converted at average exchange rates for the six-month period.

The adjusted profit-before-tax figure was better than the company’s original guidance, and Burberry said it reflected strong growth in retail, offset by expected lower wholesale revenue; the dilutive impact of the beauty transition, and a higher performance-related pay charge.

While beauty is a long-term play for Burberry, there have been challenges in the short term.

Burberry said Thursday that while the beauty division’s wholesale revenue target will remain fixed at 140 million pounds, or $223 million, retail-wholesale profits would be 10 million pounds, or $16 million, far less than the anticipated 25 million pounds, or $40 million.

Ahrendts said inventory, regulatory and short-term supply chain snags — in addition to increasedmarketing spend — had dented the original profit projection.

In addition, that 140 million pounds in revenue will be weighted to the second half, and come more from launches — such as Brit Rhythm for Men — rather than from existing products under its former license with Inter Parfums.

Burberry has also pushed up the launch of Brit Rhythm for Women to February.

Ahrendts downplayed the profit shortfall, saying it amounted to less than 3 to 4 percent of the overall company profit. And there has been no change to Burberry’s full-year profit guidance. Burberry has said it is expecting a “modest increase” over last year’s 17.1 percent operating margin, taking into account the dilutive impact from beauty.

“We are as excited as we have ever been about beauty. We are underpenetrated in the market, and we are already seeing a halo effect from the launch of Brit Rhythm for Men,” said Ahrendts.

The company said the launch of Burberry Brit Rhythm for Men — which Bailey has described as “leathery, sexy and a little bit smoky and sensuous” — spurred sales of leather jackets, while a dedicated capsule collection of products related to the fragrance generated “great results.” A Brit Rhythm pop-up has also opened in Heathrow Terminal 5.

On a separate note, Thursday’s report added that the integration of the Japanese business was “well under way” ahead of the apparel license expiry in 2015. The brand operates four mainline stores and 10 concessions in Japan, which are already trialing the global collection. “Albeit on a small base, first-half comparable-stores sales growth was up a double-digit percentage,” the company said.

Ahrendts added during the call that Burberry has recently acquired three stores in Thailand that were previously franchises.

As reported last month, revenues in the first six months climbed 16.8 percent to a record 1.03 billion pounds, or $1.59 billion, due to double-digit gains in all regions, and high-single digit comparable growth in China.

Outerwear and large leather goods drove about half of the growth and men’s tailoring continued to outperform in the period, while men’s accessories also grew strongly.

For the full 2013-14 year, Burberry said it plans to open about 25 mainline stores and close about 15 with capital expenditure around 200 million pounds, or $319 million, two-thirds of which has been earmarked for retail projects.

On Thursday, Burberry shares closed up 1.9 percent to 14.89 pounds, or $23.68.

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